The government is considering a proposal to raise the tax exemption limit on monthly transport allowance, a move that could enrich taxpayers by as much as Rs 9,000 a year, but at the same time put further pressure on its already-strained finances.

The proposal to increase the tax exemption limit for transport allowance to Rs 3,200 a month from Rs 800 follows a similar hike for government servants under the Sixth Pay Commission award. It is likely to find adoption in the private sector too, triggering greater spending across the economy and boosting the bottomlines of companies in a wide swath of sectors.

A decision on the proposal, following representations from some quarters in the government, is expected soon, a finance ministry official told ET, on condition of anonymity.

The government, which is facing the worst economic growth prospects since 2003 due to credit crisis and drought, is leaving no stone unturned to boost consumer demand and revive economic growth to the record 9% seen before the 2008 crisis.

It has cut taxes, raised spending on social and infrastructure projects and enabled lower interest rates for companies and individuals. Private final consumption expenditure nearly halved to 27% of gross domestic product (GDP) in the last fiscal year from 53.8% a year earlier as consumers restricted spending fearing job losses amid slowing sales growth and reduced profits. The consumption fall was partly offset as government final consumption to GDP rose four-fold to 32.5% from 8%, according to Reserve Bank of India data.

The move is expected to lead to an yearly additional exemption of Rs 28,800, which would yield a tax saving of Rs 8,899 a year, including the cess, to those in the highest tax bracket. While this may boost demand, the government, which is already running a record deficit of 6.8% of GDP, could lose significant tax revenues and many assesses would also fall out of the tax net.

Collection of both direct and indirect taxes are under pressure following tax rate cuts and economic slowdown. Direct tax collections grew by a modest 4% in April-August period to Rs 87,888 crore. The Central Board of Direct Taxes, which has the power to formulate and change rules, is exploring the possibility of hiking the exemption through a notification. Allowances such as transport are governed by the rule 2BB of the Section 10(14) of the Income Tax Act. The board is only required to place the new rule before Parliament whenever it has its next session.